Ex-Marsh exec says ousted president asked him to inflate profit

June 11, 2007

By now, David Marsh might be regretting he ever decided to take on former employer Marsh Supermarkets Inc. in court.

Since he filed his lawsuit last fall charging the company his grandfather founded had shortchanged him on severance, the company has stormed back with a blizzard of allegations. First, it suggested that before Marsh left as president in February 2006, he used the company "as his personal checkbook," expensing family trips to exotic locales including Africa and New Zealand.

Documents gathered as part of the spending inquiry, and filed with the court this month, include an even harsher accusation--that he pressured the company's chief financial officer to cook the books.

"David Marsh had a general disregard of proper accounting procedures and business practices. I was constantly pressured to improperly inflate company earnings," former CFO Douglas Dougherty wrote in a statement.

"In this regard, I viewed my role as being the disciplinarian to ensure that what we did was right. For example, David Marsh once threatened to fire me if I did not [overstate earnings]. Even with the threat, I did not, and would not, do what David demanded."

David Marsh--who now serves as president of the locally based convenience-store chain Crystal Flash--denies making that threat or asking anyone to wrongly inflate earnings, said one of his attorneys, Krieg DeVault partner Linda Cooley.

In court records, he and his attorneys defend as proper his spending of hundreds of thousands of dollars on travel-related expenses in recent years--even though it occurred at a time the company was under increasing financial strain.

That strain ultimately led the board to put the more-than-70-year-old public company on the block. Last October, the Florida-based private equity firm Sun Capital Partners purchased Marsh Supermarkets for $88 million in cash and the assumption of $237 million in debt.

'We were irate'

It's the new regime that's battling David Marsh, 44, in court. But records filed in the case show that by early 2006 members of the old board of directors were growing concerned over expenses charged to the company by Marsh family members.

Fueling the concern was John Elbin, a former Lilly Industries executive who served as Marsh's CFO from July 2005 until quitting four months later because of disagreements with other senior executives. On the way out the door, court filings show, Elbin passed to the board allegations of improper spending.

Until then, the board's compensation committee had been unaware that David and his father, then-CEO Don Marsh, charged expenses to the company using a special executive voucher system outside the normal expense-reimbursement process, former committee chairman Stephen Huse wrote in a statement filed with the court.

"When members of the compensation committee and I discovered that this 'e-voucher' system existed, we were irate," wrote Huse, a restaurateur whose holdings include St. Elmo Steak House. "I considered leaving the board. But I was concerned about the interests of shareholders at what was a critical time, and therefore decided to continue on the board."

In a May 2006 letter to Don Marsh, Huse questioned the CEO's spending more than $279,000 of company money on estate-planning costs for himself and other family members over two years, noting that the limit in his contract for that kind of expense was $10,000 annually.

He also alerted Don Marsh to a new company policy requiring compensation committee approval for all expenses of the top four executives prior to repayment.

"Anything other than proper practice will put the Sun Capital deal in jeopardy as well as question the reputation that you have worked so hard to build over the last 41 years as the leader of Marsh Supermarkets," Huse wrote in the letter. He could not be reached for further comment.

'Gross misconduct'

The behind-the-scenes squabbling all might have remained private if David Marsh hadn't sued Marsh Supermarkets last fall in an effort to collect a relatively small sum--$102,000 he said the company was shorting him on severance, plus an unspecified amount to supplement a stipend he received to pay for insurance coverage.

The company in early 2006 dismissed David Marsh and two of his brothers as part of a broad expense-reduction plan that included store closings. David Marsh contends in the lawsuit that his dismissal should have triggered payments of $738,000 a year for three years--about $34,000 a year more than the company said he was due.

Court records say the board ousted him after he refused to forgo about $1 million in compensation and other benefits in order to make the company more attractive to potential suitors.

The termination letter said the board was "troubled that, at a time when so many employees are making sacrifices for the good of the company and its shareholders, you ... were unwilling to adjust your compensation package in a manner similar to other executives."

According to the letter, the board reserved the right to dismiss him for cause if it later unearthed "corporate irregularities" that involved him. It followed through in March of this year, saying his spending of company money on personal expenses constituted "gross misconduct."

Marsh Supermarkets says the termination for cause was retroactive to his departure. As a result, the company contends it owes him no severance and says David Marsh must repay the roughly $750,000 he already collected.

It gets worse from there. The firm also is rejecting his claims that it should pay the more than $220,000 in legal bills he's accumulated. And it says he owes about $500,000 for improper spending.

In a court filing, attorneys for David Marsh howl in protest. They say that before Marsh left the company, Dougherty, the CFO at the time, investigated his reimbursements but found no grounds to fire him. They say the company can't go back now and reterminate a contract it already canceled. Further, they say Don Marsh approved David's spending.

"Having dramatically escalated the scope and cost of this litigation, the company now is attempting to force Mr. Marsh into submission, not only by cutting off his severance benefits but also by refusing to pay his litigation costs and expenses," David Marsh's attorneys said in a filing.

Reached at his home, Dougherty--who served as CFO from 1994 to 2005, then returned to the post after Elbin quit--declined to comment.

'Innovative ideas'

It's not clear from court records whether the company would have gone back and fired David Marsh for cause even if he had not sued to boost his severance. David Herzog, a Baker & Daniels partner representing the supermarket chain, declined to provide information beyond what's in court filings.

Attorneys for David Marsh submitted an impassioned defense to the company in February. In the 19-page letter, the attorneys disputed that the company footed the bill for some expenses. And they said many others were justified to help foster innovation and develop new store technologies at the company at a time the grocery industry was going through wrenching change.

"Over time, Mr. Marsh discovered that Marsh Supermarkets could differentiate itself in marketing and advertising by telling customers about innovative ideas that Mr. Marsh and other executives gathered by networking with businesspeople from around the world," the letter said.

"Because Mr. Marsh developed and used these networks for the purpose of building and improving the business of Marsh Supermarkets, he believed that costs associated with these activities were business expenses."

But Marsh Supermarkets contends his travels across the globe were unjustified for a struggling company that had all its stores within a few hours' drive of Indianapolis.

In particular, it questioned a series of trips he made for events staged by the Texas-based Young Presidents' Organization, a networking and personal-development group for company leaders and their families.

Jodi Marsh, his wife at the time, and their two children attended many of the trips at the company's expense, court papers charge. Jodi then was serving as the company's director of community relations, a post that paid $163,000 a year. The couple has since divorced.

The company said it is questioning YPO trips to Africa, New Zealand and China, as well as trips he took for other reasons to the Bahamas, Greece and Hawaii. Costs related to the New Zealand trip alone topped $101,000, Marsh Supermarkets records show.

The company also is charging that David Marsh used company aircraft for some personal trips and "caused one or more of the company's vendors to expend significant sums for his personal benefit," undermining the company's ability to strike financially advantageous vendor deals.

Also questionable, the company says, was a trip David and Jodi took to Tahiti, "ostensibly to explore whether Tahiti was a sufficiently attractive vacation destination to qualify as a prize in a contest the company was sponsoring."

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